Part D could save billions if CMS had negotiating power

Medicare Part D pays more for name-brand drugs than many other countries and even other U.S. government programs, such as Medicaid and the Veterans Health Administration (VHA). The Carlton University School of Public Policy and Administration found that, because brand-name drug prices are so high, many beneficiaries fail to fill prescriptions due to financial constraints. Reducing the prices would reduce premiums and co-pays, as well as taxpayer contributions used to fund Part D.

Part D

Part D is the largest federal drug program, with $69.3 billion spent on prescription drugs in 2013 and over 39.1 million people covered. Part D represents about 7 percent of the global prescription drug market, and about 58 percent of Part D spending goes to brand-name manufacturers. Plan sponsors are able to obtain rebates from manufacturers and pharmacies, but the HHS Office of Inspector General (OIG) has previously expressed doubts that these savings are passed on to beneficiaries in the form of lower premiums. Medicare itself is prohibited from interfering with these negotiations and therefore cannot leverage its purchasing power. Without congressional approval, CMS cannot reduce drug prices by securing rebates or discounts.


According to the study, due to CMS’ constraints, the Part D program pays 73 percent more than Medicaid and 80 percent more than the VHA for drugs. If Part D could secure the same prices as these other programs, it would save between $15.2 billion and $16 billion per year. However, even Medicaid and VHA pay higher prices than many countries in the Organization for Economic Co-operation and Development (OECD). The majority (21) of OECD countries cover 100 percent of their populations with a public drug plan, while the U.S. and Canada rely on private plans and have higher drug costs. Studies show that U.S. costs per capita for drugs are $1,010, while the OECD average is $498. Further, 19 percent of Americans chose not to fill prescriptions due to cost in 2014, which is a high ratio of cost related non-adherence (CRNA). Although the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) reduced the CRNA from 26 percent in 2010, other countries have ratios from 2 percent to 13 percent.

In 2014, Part D provided no coverage for the first $310 a beneficiary spent on drugs per year without a rebate, then covered 75 percent of spending between $310 and $2,850 with a rebate average of 17 percent. Between this amount and the catastrophic limit on out-of-pocket costs of $4,550, the study notes, there is limited coverage for generic and brand-name drugs although there is a mandatory discount of 50 percent for brand name drugs. The report notes that discounts and rebates are different, as rebates are reimbursed by manufacturers after the drug is purchased at full price and discounts are price reductions at the point of sale. Sponsor rebates lowered Part D payments to an average of 83 percent of official manufacturer prices.

Medicaid receives a mandatory rebate of at least 23.1 percent of the average manufacturer’s price for brand-name drugs. An inflation rebate is imposed if the average price rises faster than general inflation, and represents more than half of brand-name drug rebates. The VHA has four different options for receiving lower prices on drugs, and by utilizing the option that offers the lowest price, VHA paid on average about 46 percent of official manufacturer prices.


Proponents of the current system argue that public interference would undermine the competitive system used by plan sponsors. The report’s authors argue that Switzerland and the Netherlands also have managed competition models, like Part D, and that lower drug prices do not undermine competition among insurers and beneficiaries in these countries are subject to lower premiums. The authors also dispute the argument that reducing prices would also reduce research and development spending with by arguing that the Part D system offers few incentives for innovation, and manufacturers are more likely to produce new drugs that are extremely similar to existing drugs, but more expensive. They recommend that Part D should reduce brand name drug prices to at least match the levels of Medicaid or VHA, introduce mandatory discounts similar to VHA’s inflation discount, require generic substitution, and use these price reductions to reduce copays and deductibles.